Tax-free savings coming soon

Ingé Lamprecht

While most unit trusts, bank savings accounts, fixed deposits, retail savings bonds and exchange-traded funds (ETFs)will be eligible for inclusion in tax-free savings accounts in future, National Treasury has proposed that direct share purchases should not be allowed.

Following the release of an earlier discussion paper on non-retirement savings, some industry commentators suggested that all investment products should be included in tax-free savings accounts when it is introduced next year.

The tax-free savings account will allow individuals to contribute R30 000 per annum to a tax-free savings vehicle with a lifetime contribution limit of R500 000 and is a means to encourage household savings and to limit the vulnerability of households.

However, as part of the next round of consultation on non-retirement savings, National Treasury has proposed that the trading of individual securities within the tax-free account should not be permitted.

“The objective of the policy is to encourage short to medium term savings and investments and not speculation. If direct purchases were allowed, taxpayers may be tempted to follow a strategy of purchasing highly volatile penny stocks through the tax free account in order to create large, short-term gains which can then generate tax free income from regular investments in future periods,” it said.

However, investing in ETFs or comparable mutual investments through a stockbroker will be allowed.

Many insurance investment policies also won’t be permitted since it does not allow flexible contributions.

Entities with a banking, or collective investment scheme licence, as well as government will automatically be allowed to offer products via the tax-free savings accounts.

Stockbrokers registered with the Financial Services Board (FSB) and the Johannesburg Stock Exchange will also be permitted to offer investment products via this vehicle.

Treasury emphasised that suitable products should be simplistic, transparent and suitable.

National Treasury received more than 40 written comments in response to its prior discussion paper on the topic.

Many commentators were opposed to an earlier proposal to abolish the interest exemption saying it would compel individuals to sell their current interest-earning assets, which could trigger capital gains tax charges and other penalties.

National Treasury has now proposed that the annual interest exemption (R23 800 for individuals below 65 and R34 500 for individuals above 65) should be retained, but that it would not increase inline with inflation, allowing sufficient time for individuals to make necessary adjustments as the exemption erodes.

Although commentators have previously argued that the annual and lifetime contribution limits to the tax-free savings vehicle were too low, these limits were retained at a proposed R30 000 (adjusted for inflation) and R500 000 (not adjusted for inflation in the short term) respectively.

Suggestions to change the structure to allow the replacement of withdrawn capital from the savings account were considered, but Treasury maintains that individuals should not be allowed to replace funds that have been withdrawn.

“This design feature attempts to discourage the use of short to medium term savings (which are likely to be in liquid assets) for impulse purchases,” it said.

* The public can submit comments on the proposals to savings.incentive@treasury.gov.za until the end of April. Draft legislation and regulation on the tax-free savings account will be published by July this year.